Kurt writes:
I sponsor my son who races dirt bikes in semi-professional events. My previous accountant deducted this as advertising, but my current accountant says it’s not deductible.
I think about Nascar and how the companies who support the drivers must get that as a tax deduction. If they can do it, why can’t I? I attempted searching the IRS website, but couldn’t find anything this specific.
I assume that for it to qualify as advertising, there should be stickers of some sort on the bike in the business name, or something of this nature.
In 2007 I purchased a new bike for my son’s races. It cost around $7K and my prior accountant called it all advertising. Should I just tell my current accountant it was classified wrong and it should have been depreciated instead of put into advertising and that would solve this problem?
So, basically my question is if you have any info on sponsorships and how they are to be deducted. I appreciate any help!
My reply:
Hello Kurt, thanks for writing.
If you gave money to your son for advertising, then your son must be in the business of racing dirt bikes and then he’d report the sponsorship income he received.
If you gave the money to the event your son was in, then the event would acknowledge the receipt of the money and state whether or not anything was provided in return for the payment and if so, the FMV of whatever provided was not deductible, but any additional monies may be. You’d have to read the letter to determine if any additional monies should be classified as “advertising” (if they advertised for your business in some way), a “contribution” (and if so whether or not it’s deductible and to what extent) or a combination of the two.
If you’re giving the “advertising/sponsorship” money to a non-profit, this is a good place to start your research: http://www.irs.gov/pub/irs-tege/eotopico94.pdf.
As for the bike that was purchased in 2007, who owns the bike now? You can’t depreciate a bike you don’t own. If your business gave the bike to your son, the business no longer owns the bike. The bike was either a donation, advertising, a gift or a non-deductible expense to a family member. Again, it really comes down to whether or not your son reported it as income.
Best wishes,
Gina
I rarely continue conversations, past the first question, but I received this response and it was obvious that I wasn’t clear in my initial reply so I had to respond. The point I want to emphasize is that this is why no one should take advice that they read from anywhere on the Internet without first discussing it with their own tax professional. You may think you understand the reply or that your situation is exactly the same as the poster, but it may not be.
Kurt writes back:
Thank you for your answers…it makes a lot of sense when spelled out like that. If you don’t mind, I want to be a little more specific and see if you agree with my conclusion…
The money I expended for “advertising” is payments to vendors for bike supplies, such as tires, oil, etc. So, in essence, I am not directly giving money to my son, but I’m actually paying vendors, who are reporting it as income. So, with this thought, it would make sense that I could deduct it because the other end of the transaction IS being reported as income on the vendors return. Maybe it is just being classified incorrectly. Also, in regards to the bike, I do own it, so it seems as though this could be deductible too, since the vendor will pick it up as income. Just thru depreciation.
Please, let me know your opinion on my conclusion.
My reply:
Your business is only allowed to deduct expenses that are both “ordinary” and “necessary” for your type of business. You never told me what type of business you are in so I do not know if it is both “ordinary” and “necessary” that you purchase, bikes and bike supplies for your business.
If it is not “ordinary” and “necessary” that your business purchase “bike supplies, such as tires, oil, etc.” then it’s not a legitimate business deduction. Thus you wouldn’t be able to deduct anything, certainly not advertising. These vendors (the people you are paying) are not providing you any advertising are they? And if they are, then are you “overpaying” for the bike and bike supplies? If so, then the “overpayment” may be considered advertising, but not the actual merchandise that you receive.
In addition if you give your son ANYTHING from your business, whether it be money or property, then your business would have to report whatever it gave your son and he would have to include it in his income, or it’s not deductible for your business.
If purchasing “bike supplies, such as tires, oil, etc.” is considered “ordinary” and “necessary” in the business that you are in, then yes you could capitalize the bike and depreciate it, but if this were the case you’d probably already have other bikes on your balance sheet that you’re depreciating so you wouldn’t be asking this question.
There are actually ways you may be able to arrange your affairs such that it becomes legal to deduct expenses such as these. The easiest would be if your son were in the business of professional biking. If you were my client I’d start by asking you these questions:
- How old is the child?
- How long has he been in biking competitions (for money and not for money)?
- How often does the child win?
- What is the probability or potential of your child earning more money than he spends being a professional biker?
- Do you know of anyone who has a child who is a earning more money than he spends being a professional biker who would be willing to mentor you and your son?
If you can answer the above questions in such a way that it seems reasonable that your son could have a profitable company, then I’d discuss the positives and negatives of it. Once your son has a company then instead of purchasing him “bike supplies, etc.”, your business could write his business a check for your son putting your business’s name & logo on his bike, helmet, T-Shirt, etc. and it would become advertising for your business and sponsorship income for your son’s business. If your son doesn’t race then there was no advertising, so timing is essential. If your son never wins then there’s two problems, the first and the one I’d be most concerned about is that the IRS would view the son’s biking as a hobby and not a business. In addition, the advertising would have to be really cheap, practically free for a losing biker.
Best wishes,
Gina
